SShoppers Drug Mart Corp.'s bet on standalone stores for high-end cosmetics is starting to show cracks.
On Thursday, the country's largest drug-store chain took a $5-million pretax charge to cover the shutdown of two of its eight Murale beauty stores, resulting in the retailer's second-quarter profit slipping to $146-million, or 70 cents a share, from $148-million or 68 cents a share a year earlier. (There were fewer shares outstanding in the latest period.)
Some analysts now predict that Murale's days are numbered, even while the retailer counts its high-margin cosmetics departments as among the strongest in its mainstream drugstores.
"They're committed to the [Murale] brand or the format until they're not," said Kenric Tyghe, retail analyst at Raymond James. "I don't think it works … It was a misstep from Day 1."
The company bet heavily on its beauty business to fuel growth while it grapples with profit-pinching generic drug reforms and a shaky economy.
The chain continues to pump up its array of brands and space devoted to cosmetics and fragrances in its namesake drugstores, managing to grab market share from department-store retailers that have dominated the lucrative field.
But a growing array of rivals are stepping up their own cosmetics initiatives, including foreign-owned retailer Sephora and a revitalized Bay, which has stolen away the former head of Murale to oversee its own beauty business. Shoppers will face new challenges when U.S. cheap-chic chain Target Corp. arrives in 2013; within a few years, U.S. upscale department-store retailer Nordstrom Inc. also plans to set up shop here.
Amid heated competition, Domenic Pilla, Shoppers' chief executive officer, says he's focused on bolstering its beauty business and using Murale as a testing ground for his mainstream stores.
"Murale is still very much an important part of our strategy on the beauty business," Mr. Pilla told a conference call on Thursday, adding the remaining six beauty stores are performing well.
But he also said the company will be "diligent" and, as with any of its Shoppers outlets, "we will be disciplined and close stores where they're not performing."
He singled out cosmetics as one of Shoppers' fastest growing segments in its second quarter, helping the retailer post a 3.4-per-cent increase in same-store sales (in outlets open a year or more) among non-prescription "front store" merchandise.
And excluding the impact of the Murale store-closing charge, Shoppers' profit rose to $149-million or 71 cents a share from a year earlier, beating analysts' estimates by a penny.
Mr. Tyghe said Shoppers has proved itself a stellar beauty-retail player in its own right, having broken new ground in introducing more upscale brands such as Clinique, which previously shunned the lowly drugstore. The chain doesn't need Murale to establish its credibility with key suppliers, he said.
"On all evidence to date, [Murale] was a step too far," Mr. Tyghe said.
When Shoppers launched Murale in late 2008, the then-CEO predicted it could expand to 50 stores within five years, while some analysts had pegged the number at as many as 200.
Shoppers intended to use Murale as a way to persuade luxury cosmetics suppliers to view it as a legitimate competitor to department stores. And according to scant data available, Shoppers has managed to nab market share from rivals, Mr. Tyghe said.